Management Accounting Report: Cost Analysis and Budgeting

This report delves into the core principles of management accounting, providing a comprehensive analysis of costing methods, budgeting techniques, and financial performance evaluation, using UKC Furnitures as a case study. The report explores various costing techniques, including marginal and absorption costing, illustrating their application through detailed cost cards and comparative analysis. It further examines different management accounting techniques such as standard costing and historical costing, highlighting their significance in enhancing organizational performance. The report also investigates the advantages and disadvantages of planning tools used in budgetary control, alongside the estimation of expenses using the high-low method. Moreover, the report discusses the purpose of budgeting and the creation of a cash budget, concluding with an examination of how organizations adapt management accounting systems to improve financial performance. The report also focuses on how management accounting helps to resolve financial problems by using KPIs and other financial governance techniques.

Management
Accounting
Part 2

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1 Calculation of cost by using various management accounting techniques...........................1
1.2 Different management accounting techniques......................................................................4
1.3 Interpretation of the cost cards of marginal and absorption costing techniques...................4
TASK 2............................................................................................................................................5
2.1 Advantages and disadvantages of planning tools that are used in budgetary control...........5
2.2 Estimation of expenses by using high low method...............................................................6
2.3 Purpose of budget and preparation of cash budget...............................................................6
TASK 3............................................................................................................................................8
3.1 The ways in which organisations are adapting management accounting system.................8
3.2 Management accounting help to improve the financial performance of both the companies
.....................................................................................................................................................9
3.3 Evaluation of planning tools to resolve financial problems................................................10
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Management accounting is the process of controlling, managing, analysing, assessing and
evaluating reports that are generated by the managers of the companies. All of them presented in
front of internal stakeholders such as managers, directors, equity shareholders in order to analyse
organisation's performance its position in the market (Hiebl, 2014). It helps the managers to
make strategic decisions so that all the predetermined goals like profits maximisation and
customer satisfaction can be successfully achieved. For all the business entities it is very
important to conduct management accounting every year so that actual status of the company can
be examined. The company which is chosen for this report is UKC Furnitures. Various aspects
are discovered under this report such as application of range of different management accountant
techniques and uses of planning tools. Comparison of the way in which company can use
management accounting to respond financial problems have also been covered under this
assignment.
TASK 1
1.1 Calculation of cost by using various management accounting techniques
Cost: It can be defined as the total expenses that have been faced by an organisation
while manufacturing a product. There are various types of cost that may take place in the
production process. These are fixed, variable and semi variable. The expenses that does not
change with the production are considered as the fixed. All the costs that are varies with the
manufacturing units are the part of variable costs. All the expenses that are partially fixed and
partially variable are called semi variable. As UCK Furnitures is a manufacturing company
hence all these costs are faced by the company in the production process. It is very important for
the managers of the company to set appropriate prices for all the items that are sold by the
organisation so that large number of customers can be attracted. It will help to expand the
business in different locations (Arroyo, 2012). There are two main types of costing techniques
that can be adopted by the company in order to determine profits. Both of them are described
below with the cost card:
Marginal costing: It is technique which is used by the companies to calculate the
marginal cost that depicts that organisation is achieving economy of scale or not. In UCK
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Furnitures this method is used by the managers to evaluate the level where the organisation can
attain profits. It helps to analyse the impact of variable costs on the output units of the company.
Cost card for this method for two months is as follows:
January
Particulars` Amount
Total sales (35*9000) 315000
Variable costs:
Opening inventory Nil
Direct material (12*11000) 132000
Direct labour (8*11000) 88000
Variable overheads (5*11000) 55000
Closing inventory (25*2000) -50000 -225000
Variable selling cost -9000 -9000
Gross profit 81000
Fixed costs:
Fixed production cost 2000
Fixed selling cost 20000 -22000
Net profit 59000
February
Particulars` Amount
Total sales (35*11500) 402500
Variable costs:
Opening inventory (25*2000) 50000
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Direct material (12*9500) 114000
Direct labour (8*9500) 76000
Variable overheads (5*9500) 47500
Closing inventory Nil
Variable selling cost -11500 -287500
Gross profit 103500
Fixed costs:
Fixed production cost 2000
Fixed selling cost 20000 -22000
Net profit 81500
Absorption costing: This method is used to analyse the absorption cost. According to
this method all the expenses that are involved in the production process are going to be absorbed
from the sales. In UCK Furnitures this technique is used to analyse that organisation is able to
recover all its direct and indirect expenses from all the revenues (Merchant, 2012). Cost card of
absorption costing for January and February are as follows:
January
Particular Amount
Sales (35*9000) 315000
Production cost
Opening inventory Nil
Direct material (12*11000) 132000
Direct labour (8*11000) 88000
Variable overheads (5*11000) 55000
Overheads absorbed (2*11000) 22000
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Closing inventory (27*2000) -54000
Over/ under charged -2000 -241000
Gross profit 74000
Non production costs:
variable selling costs 9000
Fixed selling cost 2000 -11000
Net profit 63000
February
Particular Amount
Sales (35*11500) 402500
Production cost
Opening inventory (27*2000) 54000
Direct material (12*9500) 114000
Direct labour (8*9500) 76000
Variable overheads (5*9500) 47500
Overheads absorbed (2*9500) 19000 -310500
Over/ under charged -1000 -1000
Closing inventory Nil
Gross profit 91000
Non production costs:
variable selling costs 11500
Fixed selling cost 2000 -13500
Net profit 77500
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1.2 Different management accounting techniques
There are various management accounting techniques that can be used by managers of
UCK Furnitures in order to enhance its performance. All of them are described below:
Standard costing: It is a traditional technique which is used to compare actual and
budgeted figures of a company. In UCK Furnitures this method is used by the managers to
determine the difference between actual and standard performance in order to make strategic
decisions. It helps to control all the costs and also help to make strategies so that production
expenses can be reduced (Cooper, Ezzamel and Qu, 2017).
Historical costing: This method guide organisations to record all the assets and liabilities
in the financial reports on historic prices so that actual status of the company can be determined
by stakeholders. In UCK Furnitures this method is used to identify the difference between
replacement and original cost of assets.
1.3 Interpretation of the cost cards of marginal and absorption costing techniques
Two different types of techniques are used to calculate net profits of UCK Furnitures.
While calculating net income from marginal costing it has resulted in 81000 gross profits for
January and 103500 for the month of February. In absorption costing gross profits for January
and February are 74000 and 91000 respectively. Net profits by marginal costing are 59000 and
81500 fro both the months and by absorption costing net profits are 63000 and 77500 for January
and February. It has been suggested to the company to use marginal costing as it shows higher
gross profits as compare to another method.
TASK 2
2.1 Advantages and disadvantages of planning tools that are used in budgetary control
Budget: It can be defined as a financial plan which is made by the organisations in order
to reduce over spendings. In UCK Furnitures budgets are formulated by the managers in order to
successfully operate the business. If the organisation is planning to execute business in
appropriate manner than it is very important to control the budgets. Budgetary control can be
explained as the procedure of setting financial goals that are going to be achieved in upcoming
period (DRURY, 2013). Different types of planning tools are used by the management of the
business entity in order to achieve all the objectives. All of them are discussed below:
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Contingency Tools: Such type of tools help the companies to analyse possible
contingencies that may take place in future and affect overall performance of the organisation. In
UCK Furnitures such type of tool is used to deal with all the problems that may result negatively.
The problems are reduction in the demand of products and reduced profits.
Advantages Disadvantages
It guides the managers to take appropriate
action in difficult conditions.
Technical knowledge is required to implement
such type of tools it is not possible to use them
without proper knowledge.
All the unfavourable situations like reduction
in profits can be determined with the help of
contingency tools.
It takes a lot of time to implement this tool.
Forecasting Tools: The possible outcomes of operations can be estimated with the help
this tool. It can forecast positive as well as negative impact of the actions that are taken by
managers and other members of the company. In UCK Furnitures forecasting tools are used to
determine the situations that are going to be faced by the organisation in future (Chan, Wang
and Raffoni, 2014).
Advantages Disadvantages
It can help the managers to be prepare to face
possible future consequences.
It is not possible to forecast conditions
appropriately.
It is very beneficial to plan in advance for
future situations.
Cost involved in the application of such tools
and it is not possible for all the companies to
bear high cost.
2.2 Estimation of expenses by using high low method
For the estimation of the expenses for different working hours high low method is used
and the calculations for this are as follows:
Step 1: Identification of the highest and lowest activities
Higher activity level= 795 hours in June
Lower activity level= 505 hours in February
Step 2: Calculation of variable cost per hour
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variable cost per hour= Difference between cost component of highest and lowest activity
level/ difference between higher and lowest activity level
= (9820-7410)/ (795-505)
= 8.31 per hour
Step 3: Calculations of fixed cost
Fixed cost= Higher activity cost- (variable cost per unit* highest activity units)
or Lowest activity cost- (variable cost per unit* lowest activity units)
= 9820-(8.31*795)
= 3213.55
Step 4: Calculation of total variable cost
Total variable cost= variable cost per hour* number of required hour
For 650 hours= 8.31*650
=5401.5
For 750 Hours= 8.31*750
= 6232.5
Step 5: Calculation of total cost for July and August
Total cost= Fixed cost+ variable cost
For 650 hours= 3213.55+5401.5
= 8615
For 750 hours= 3213.55+6232.5
= 9446
2.3 Purpose of budget and preparation of cash budget
Purpose of budget:
 Budgets are generated to smoothly run the operations because if all the departments are
having sufficient funds then business can be executed successfully.
 Another purpose of budget is to forecast future incomes and expenses in order to make
strategic decision (Nitzl, 2016).
Preparation of cash budget:
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TASK 3
3.1 The ways in which organisations are adapting management accounting system
Calculation of Ratios:
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KPI: Key performance indicators are mainly used to evaluate performance business
entities so that profits can be maximised. In UCK Woodworks it is used to resolve the problem
of reduced profit margins as it can help the managers to measure success and failure of the
actions. When they have idea of success or failure than they can plan in advance to overcome all
the problems like profit reduction (Melnyk and et.al., 2014).
Financial governance: This technique guide the organisations to apply all the
accounting rules and regulations so that business can be operated appropriately. UCK
Woodworks and UCK Furnitures has faced the problem of low asset turnover so that it is
necessary for manager to manage the current asserts properly. As a result this problem can be
resolve. (Gunarathne and Lee, 2015).
UCK Furnitures UCK Woodworks
ROCE of the company is 17.24% which means
that organisation is getting higher returns on
the investments.
ROCE of the organisation is 8.6% that depicts
that it is receiving less returns on the
investments as compare to UCK Furnitures.
Asset turnover ratio of the company is 0.68
time which shows that organisation's efficiency
is high (Bennett, Schaltegger and Zvezdov,
2013).
Asset turnover ratio of the company is low as
compare to UCK Furnitures which means that
overall efficient of the company is not good.
Operating profits margin of this organisation is
25.03% which depicts that the company is
It margin is low as compare to other company
hence the managers should make appropriate
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having good operating profit margin. decisions to enhance profits.
3.2 Management accounting help to improve the financial performance of both the companies
From the above comparison it has been identified that UCK Woodworks is facing
different types of financial problems such as low operating profit margin and asset turnover.
Following techniques can be used by the managers UCK Furnitures and UCK Woodworks in
order to overcome all the issues:
Price optimum system : Price optimum system can be used by the organisation so to
reasonable price can be set and consumer show their willingness to buy the products of UCK
Woodworks and UCK Furnitures
Job order costing : Job order costing is a system for assigning manufacturing costs to an
individual products or batches of products. Both organisation can use this system to improve its
financial performance (Job order costing. 2018).
Inventory management system: Inventory management system can be use by UCK
Woodworks to manage and control the inventory so that unnecessary cost be control in context
to stock.
So financial performance of UCK Furnitures and UCK Woodworks can be improve by
using these systems.
3.3 Evaluation of planning tools to resolve financial problems
In UCK Furnitures two different types of planning tools are used to overcome all the
financial problems because they can help to estimate them in advance. There are various
different methods that can also be used to resolve financial problems that may take place in
future or currently faced by the organisation. These are variance analysis, ratio analysis,
budgetary control etc. All these methods guide the managers to evaluate organisation's
performance and problems and than make policies so that all of them can be dealt appropriately
(Dekker, 2016).
CONCLUSION
From the above project report it has been concluded that management accounting can be
described as the process of analysing organisational performance with the help of reports.
Different types of system such as cost accounting, price optimisation etc. are used by the
companies to find solutions for business problems such as inappropriate information of cost and
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decreasing profits. Manage accounting reports are also generated by organisations that provide
solution for the issue of lack of appropriate organisational problems. All the systems help entities
to overcome financial crisis as it helps to find best ways to deal with them. Planning tools like
forecasting and contingency also guides to find best solutions for financial problems by
analysing them in advance and be prepare to deal with them in future.
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